Congressional leaders optimistic after meeting Obama

WASHINGTON (Reuters) - Republican and Democratic congressional leaders emerged from a meeting with President Barack Obama on Friday pledging to find common ground on taxes and spending that would allow them to avert a looming "fiscal cliff" that could send the economy back into recession.

The top lawmakers spoke to reporters as a group for the first time in more than a year in what aides said was a joint decision to project a message of unity.

Each side at least signaled a willingness to put "on the table" issues dear to the two parties for decades.

The two Democrats, Senate Majority Leader Harry Reid and Nancy Pelosi, the minority leader in the House of Representatives, said they recognized the need to curb spending.

John Boehner, the Republican speaker of the House, and Mitch McConnell, who leads the party in the Senate, said they had agreed to put "revenue on the table" as the two sides enter what are likely to be weeks of tense negotiations before a December 31 deadline.

Starting on January 2, about $600 billion worth of tax increases and spending reductions, including $109 billion in cuts to domestic and defense programs, will begin to kick in if Congress cannot decide how to replace them with less extreme deficit-reduction measures.

Nonpartisan budget forecasters say failure to reach a deal could push the U.S. economy back into recession and drive up the unemployment rate.

Both sides are eager to reassure the public that Washington will not see a repeat of the white-knuckle budget standoffs that spooked consumers and investors last year.

"We have the cornerstones of being able to work something out," Reid said, standing outside the White House after a meeting with Obama, Vice President Joe Biden and other top officials that lasted more than an hour.

The S&P 500 stock index has dropped 4.7 percent since the November 6 election as investors have turned their attention to the uncertainty surrounding the fiscal cliff.

But stocks closed up on Friday on hopes that politicians would find common ground to steer clear of the danger.

The meeting marked the first time Obama, a Democrat, sat down with his Republican opposition since he won re-election last week.

"I think we're all aware that we have some urgent business to do," Obama told reporters at the beginning of the meeting.

ROOM FOR COMPROMISE?

Obama says tax rates on the wealthiest 2 percent of Americans must rise, while Republicans say they will not agree to any rate increase.

Republicans are also eager to rein in government health costs, which are projected to explode over the coming decade.

"We're prepared to put revenue on the table provided we fix the real problem," McConnell said, referring to Medicare and other government benefit programs.

There could be room for compromise.

Obama could agree to allow the top tax rate to rise to something less than the 39.6 percent he wants. Policymakers, for example, could also agree to limit the tax increase to households making more than $500,000 annually, rather than the $250,000 cap Obama is demanding.

Republicans have suggested generating more revenue by limiting tax breaks for the wealthiest, rather than raising their rates. Obama has said that would not raise enough money.

While the government may have a little flexibility in softening the full impact of the budget cuts, Treasury Secretary Timothy Geithner told Bloomberg TV on Friday the Treasury Department did not have the authority to delay the tax increases that would take effect at the start of next year if the White House and Congress fail to reach a deal.

Business leaders say the uncertainty is already weighing on the economy as employers postpone hiring and capital expenditures until they get a better sense of the tax and spending environment.

Pelosi suggested two sides might forge a temporary deal that would get them past the fiscal cliff and give them more time to work out a more lasting solution. Lawmakers will almost certainly not have time to retool Medicare and overhaul the outdated tax code before the end of the year, but a preliminary agreement could provide a framework for doing so later.

"The speaker spoke about a framework going into next year. I was focusing on how we send a message of competence to consumers, to the markets, in the short run, too." Pelosi said.

Leaders of civic groups who met with Obama at the White House later on Friday, said the president assured them he would use his leverage to cut the best deal possible.

"He campaigned around tax fairness and the fact that everyone would do their part, and in particular the most wealthy would find a way to make their fair contribution," said Janet Murguia, president of the National Council of La Raza, a Latino advocacy group.

Boehner faces a delicate balancing act as he will have to sell any deal to rank-and-file conservatives, many of whom believe they owe it to their constituents to hold the line on taxes.

But after Obama won re-election and fellow Democrats picked up seats in the House and Senate last week, Republicans may be more willing to show that they can balance their ideals with the demands of the country as a whole.

"Going over the fiscal cliff, in my view, is a bucket of crazy," Republican Representative Peter Roskam, one of Boehner's deputies, said at a budget conference.